New ISA Rules: What You Need to Know

The new ISA rules are great for savers, but you might be confused as to what they entail.

Here are the most important things you need to know.

What Has Changed?

From July 1 2014, ISA accounts changed to New ISAs (NISAs). The biggest change is the increase in your annual allowance, which now stands at £15,000 in cash, stocks and shares or any combination of the two. So, you don’t need to have the allowance put in to just one option.

You are also able to freely transfer your last years’ ISA savings between stock and share options, as well as cash.

Do I Need to Save the Full £15,000?

You are free to save and invest as much you want under the £15,000 limit. The difference is, as mentioned above, that you don’t need to spend your tax-free allowance in one specific investment or saving.

It is still worth keeping in mind that your unused allowance doesn’t roll over to the next year. Therefore, if you don’t use the full £15,000, you won’t enjoy any additional benefits next year. So, if you want to make the most of your New ISA, you should save as close to the limit as possible.

The investments you make will keep earning interest and reap the benefits until you need to withdraw the money.

What If I Want to Withdraw?

You are allowed to withdraw money from your New ISA at any time, depending on the individual rules of your ISA account. You won’t lose your tax benefits by withdrawing money.

If you do decide to withdraw money from your account, you won’t get an increase in your annual £15,000 allowance. For instance, if you invest the full £15,000 at the start of the tax year and then withdrew £2,000 from your account later that year. You wouldn’t lose any tax benefits, but you wouldn’t be able to add anymore to your ISA during that tax year, either.

How Are New ISA's Treated for Inheritance Purposes?

Unfortunately, the ISA changes don’t change the situation in case you die before withdrawing your money. Any ISAs you hold, whether cash or stock investments, will be lumped together with your other assets and therefore, fall under inheritance tax.

Furthermore, New ISAs will lose their tax benefits and will become liable to income tax or capital gains tax, if you pass away.

What Type of NISA should I Pick?

You have two New ISA options available for you: the cash saving ISA and the investment ISA. As you have more flexibility now between the two types, you might want to consider which one to pick, or whether investing in both is a better idea.

There are different types of options in both of these ISAs. Cash saving ISAs are great because you don’t need to pay any tax on the interest. But investments ISAs are a bit trickier, as some tax rules still apply. Generally, if you are a small investor, you typically enjoy more benefits by just using your cash NISAs. If you belong to the higher rate tax bracket and you are a big investor, you might benefit more by splitting your allowance between the two NISAs.